Part of the proposed deal struck between President Obama and Republican legislators is a one-year, two-percent “tax holiday” on payroll taxes—the taxes that fund Social Security.
The idea is being sold as a no-loss gift to wage earners: They keep an extra 2 percent of their paychecks and there’s no loss to the Social Security trust fund because the shortfall is made up out of the general treasury. Which, since the money ultimately comes out of the general fund, is (as one of my law professors was fond of saying) “the long way ‘round the barn.” Why not take the direct route and pay the money out of the general fund in the first place?
Dean Baker, an economist and co-director of the Center for Economic and Policy research, said in a telephone press conference that there’s already a program in place—although it expires this year—to draw from the general fund in order to refund taxes to wage earners. It’s the Making Work Pay program, which gave a $400 tax credit to most taxpayers making less than $75,000 per year. As Baker points out, not only is this program already in place, it’s far cheaper than the tax holiday—and it results in a greater effect where it’s most needed: at the bottom of the pay scale.
According to Baker, you needed to make only $5,000 a year to get the full $400 available under Making Work Pay. The payroll tax holiday doesn’t return that much money until you make $20,000—which, Baker said, excludes fully one-third of wage earners. What’s more, the 2 percent tax holiday applies to the first $106,800 in earnings which, as Baker pointed out, means Bill Gates and Warren Buffet will get $2,136—five times as much as the person making $20,000. As a result, the cost of this proposal is double the cost of Making Work Pay, but its effect as an economic stimulus is limited by the fact that a big chunk of its $120 billion cost will go to wealthier people who won’t spend that money back into the economy.
But whether or not the tax holiday makes economic sense, it represents an enormous change—and threat—to Social Security. There has never before been a payment from the nation’s general fund into Social Security. Maintaining the distinction between the two is critical, according to Nancy Altman, co-director of Social Security Works, speaking in the same press conference. Altman’s credentials include acting as Alan Greenspan’s assistant when he chaired the commission that amended Social Security in 1983. “I think it’s unfathomable that this is only going to last a year,” Altman said. “If this gets extended, we’ll have increasing costs. Congress will then have an unpalatable set of choices: Either extend funding and cut other spending, or cut Social Security.”
It’s ironic that this is being sold as a temporary cut in the context of extending the Bush administration’s supposedly temporary tax cuts. In fact, Republican legislators have already announced that, when it comes time for the payroll tax holiday to expire, they’ll be calling it a tax increase, and fighting to extend the decrease.
There’s even a great way to make it seem like a really scary increase: The tax holiday will take the worker’s share of payroll taxes from 6.2 percent to 4.2 percent, a 2 percent decrease. But when comes time for the holiday to end, it’s going to be called a 50 percent increase. That’s mathematically correct, since two is about half of 4.2. But that sounds much worse than an increase of two percentage points.
Not to mention that, as we’ve learned from the extension of the Bush tax cuts, there’s no traction for the argument that letting a tax cut expire is just a return to the status quo. “It’s easy to enact tax cuts, and very hard to turn them around,” said Barbara Kennelly, President and CEO of the National Committee to Preserve Social Security and Medicare.
“There’s no reason to do it this way other than as an assault on Social Security,” Kennelly said.